Apple needs to consider releasing a lower-end phone to gain market share in China, according to an analyst

Apple saw a dip in its smartphone market share in China as the company was overtaken by local rival Xiaomi, a seller of low-priced handsets that has been making waves in the country's tech industry.

During the second quarter, Apple was ranked seventh among China's smartphone vendors, with a market share of only 5 percent, according to research firm Canalys. This was down 3 percentage points from the previous quarter.

Xiaomi's market share was also at 5 percent, but the company's smartphone shipments narrowly surpassed those of Apple, said Nicole Peng, an analyst with the research firm.

"This is amazing for a company that only started to ship products two years ago," she said. "It's really big progress for a company that is so young."

Xiaomi has achieved part of its success by releasing phones with high-end specs, but at lower prices. In the second quarter, the company began selling an updated version of its flagship product that can go for as low as 1699 yuan (US$275) when bought without a contract. The Android phone features a quad-core 1.7GHz processor from Qualcomm, a 4.3-inch 720p screen, and a 13-megapixel camera.

Xiaomi phones are only sold in China and Taiwan. But the company plans to begin exploring other foreign markets next year. In the meantime, it wants to sell 15 million phones by the end of 2013, double of what it sold in the previous year. The company is expected to unveil a new flagship phone later this month.

Apple saw its share decline in China as the country's smartphone market grows at a breakneck pace. During the quarter, China made up over a third of the total smartphone market in the world, according to Canalys. Shipments to the country grew 108 percent year-over-year in the period, reaching a little over 88 million units. In contrast, shipments to the U.S. only reached about 33 million units.

Consumers in China are holding off buying new iPhones, and are instead waiting for the next model, Peng said. But at the same time, low-end smartphones are currently driving the market, a device segment Apple has yet to address.

"Even Samsung, they actually benefit quite a lot from the mid to low-end market in the quarter," she added. "I think it's time for Apple to re-evaluate their product profile for the Chinese market. The country is big enough for them to consider a localized product for China."

During the quarter, Samsung continued its reign as China's largest smartphone vendor, followed by domestic vendors Lenovo, Yulong Computer Telecommunication Scientific, ZTE and Huawei.

Rumors continue to circulate that Apple is working on releasing a lower-end iPhone product. Last week, Xiaomi came out with its own budget phone, priced at 799 yuan.